States Punt on Tax Increases for FY2011

June 17, 2010

The State of Illinois is not the only cash-strapped state that shied away from major tax increases to improve its financial condition in FY2011. According to Stateline.org, most states avoided raising significant revenue and instead patched together FY2011 budgets by finding a few new items to tax, curtailing spending and relying on federal stimulus dollars.

So far only Kansas and Arizona have raised their sales tax rates this year, according to Stateline, a daily online publication of the Pew Center on the States. Other states have dropped exemptions on items that were previously not taxed, such as to-go containers from restaurants, and eliminated certain tax credits. Colorado and Washington State extended the sales tax to candy and soda, a step also proposed by the governors of Massachusetts and New York. Illinois expanded its sales tax to candy in the FY2010 budget to help fund the State’s capital program. Cigarette taxes were raised in the FY2011 budgets of seven states, after more than a dozen raised them last year. In Illinois, a cigarette tax increase was passed by the Senate but did not make it through the House.

States stayed away from higher taxes on the rich, a measure used by eight states in their FY2010 budgets. Governor M. Jodi Rell vetoed legislation that would have made Connecticut the first state in the country to levy a tax on bonuses of more than $500,000 given to executives of companies that received federal bailout funding. In New Jersey, Governor Chris Christie vetoed a measure that would have restored a tax on the wealthy as part of his plan to fix the state’s budget deficit only with cuts.

Rhode Island was the only state that made a fundamental change to its tax structure this year. Voters in Maine rejected a plan to decrease income taxes while extending the sales tax to more goods and services. The governors of Michigan and Pennsylvania proposed sweeping plans to tax services, but the proposals went nowhere.

Illinois and six of the other nine states are relying on additional federal Medicaid funds from Congress to help them through FY2011, although it remains unclear whether Congress will approve the funding. Five of the states—Illinois, California, Pennsylvania, Massachusetts and New York—will also elect governors this November.

As previously discussed in this blog, the Illinois General Assembly recessed in May of 2010 without passing a balanced budget for FY2011, which begins on July 1, 2010. The budget passed by the General Assembly contains a General Funds operating deficit of $5.9 billion, which would be partly closed through borrowing a total of $2.2 billion from the State’s Special Funds and from proceeds from the settlement of tobacco litigation. Governor Pat Quinn wanted to close the remaining $3.7 billion operating gap by borrowing to fund the General Funds contribution to the state’s retirement systems, but that measure was not passed by the Senate. In addition to the operating deficit, Illinois has an accumulated deficit of roughly $6.1 billion carried over from prior years.

Illinois’ credit rating has been lowered twice in June of 2010—on June 11 by Fitch Ratings to A from A+ and by Moody’s Investors Service on June 4 to A1 from A3. “The State has not demonstrated the political willingness to take action during the fiscal crisis to restructure its budget to achieve balance and has relied almost exclusively on borrowing to close its sizeable budget gaps,” Fitch said.